Investor sentiment toward American Express (AXP, Financial) has soured considerably over the past year. After experiencing highs of about $90 per share in 2015, shares have sold off to about $62 today.
There are fairly clear reasons for the sell-off -- the most visible being the loss of transaction exclusivity with Costco (COST, Financial) with no obvious replacement for that lost revenue.
Patient investors should have a look at these current levels. Here’s why:
AXP has a solid balance sheet and a history of strong fundamentals.
The company has embarked on a series of initiatives that should pay off over the longer term, and you can collect a dividend while waiting.
Shares are reasonably valued at these levels.
American Express has a history of solid fundamentals
Have a look at the graphic below. Over the long run, AXP has admirably grown book value per share over a number of market cycles.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
In addition, the company continues to benefit from a large cash position, arguably enough to sustain the company while it implements efforts to restore itself to previous earnings levels.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
Company initiatives underway
Of course the bread and butter of AXP is new card members. To that end, the company has embarked on an aggressive marketing and technology effort to attract those customers.
At the same time, company leaders continue to focus on streamlining and restructuring to improve operational results. Management has indicated that acquisitions could be a part of the larger effort. All things considered, management seems to be doing the right things at the right time. The key for potential investors is to plan to be patient to give the initiatives time to work.
Shares are favorably priced at current levels
So we might believe AXP is a quality company, and we might have faith in management’s ability to improve the bottom line over time. In my view, another key piece to consider is the price to value relationship.
I come from the school of thought that believes a company’s own historical valuation is a nice clue to future performance. To understand the price-to-value relationship, I often turn to my F.A.S.T. Graphs subscription because a picture can be worth a thousand words.
First, let’s note that AXP’s own normal PE over the past 10 years was 14.4X. The company’s average PE over the past 20 years is 18.9X (represented by the blue line).
Today the PE is 11.6X, well below historical norms.
For a longer historical view, have a look at the graphic below.
Note how the market price (black line) over time trends toward the company’s average PE. Also note how the black market price line today is well below the historical norm (blue line) and also a “valuation line,” which assumes a PE of 15X.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
In my view, this suggests that AXP is reasonably priced or even undervalued at current levels.
While the near-term will likely be a challenge, patient investors -- those willing to consider holding periods measured in years and not days, weeks or months -- have an opportunity to see above average total returns on this dividend-paying name-brand company.
